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  Ricardo uses as examples wine and wool. Portugal can produce both wine and wool cheaper than England, but Portugal has to give up more bottles of wine to gain a yard of woolen cloth than England. Thus, Portugal has a comparative advantage in producing wine, and England has a comparative advantage in producing wool. If each country specializes where it has comparative advantage, the total production of wine and wool will be greater than if each country produced both products. “The gains from trade” result from sharing the increase in total output by trading the two commodities on terms favorable to both countries. Therefore, specialization and trade will allow each country more consumption of both products than if each country were self-sufficient.

  The different opportunity costs of one good in terms of another (the cost of wine in terms of wool) means that the trading partners have different relative price ratios for producing tradable goods. It is this difference that creates comparative advantage. In Ricardo’s time, unique national characteristics, climate, and geography were important determinants of relative costs. Today, however, most combinations of inputs that produce outputs are knowledge-based. The relative price ratios are the same in every country. Therefore, as opportunity costs do not differ across national boundaries, there is no basis for comparative advantage.

  Ricardo’s other necessary condition for comparative advantage is that a country’s capital seeks its comparative advantage in its home country and does not seek more productive use abroad. Ricardo confronts the possibility that English capital might migrate to Portugal to take advantage of the lower costs of production, thus leaving the English workforce unemployed, or employed in less productive ways. He is able to dismiss this undermining of comparative advantage because of “the difficulty with which capital moves from one country to another” and because capital is insecure “when not under the immediate control of its owner.” This insecurity, “fancied or real,” together “with the natural disinclination which every man has to quit the country of his birth and connections, and entrust himself, with all his habits fixed, to a strange government and new laws, check the emigration of capital. These feelings, which I should be sorry to see weakened, induce most men of property to be satisfied with a low rate of profits in their own country, rather than seek a more advantageous employment for their wealth in foreign lands.”

  Today, these feelings have been weakened. Men of property have been replaced by corporations. Once the large excess supplies of Asian labor were available to American corporations, once Congress limited the tax deductibility of CEO pay that was not “performance related,” once Wall Street pressured corporations for higher shareholder returns, once Wal-Mart ordered its suppliers to meet “the Chinese price,” once hostile takeovers could be justified as improving shareholder returns by offshoring production, capital and jobs departed the country.

  Capital has become as mobile as traded goods. Indeed, capital can move with the speed of light, but traded goods have to move by ship or airplane. Economists would be hard-pressed to produce stories of American capital seeking comparative advantage in the 50 states. But they can easily show its flight abroad. Approximately half of U.S. imports from China are the offshored production of U.S. firms for the U.S. market.

  Most economists, whom I have labeled “no-think economists,” learned in graduate school that to question free trade was to be a protectionist – a designation that could harm one’s career. I personally know many economists who are terrified to be anything but free traders, but who have no understanding of the theory on which free trade is based or of the theory’s many problems.

  For most economists, free trade is a dictum like the Bush regime’s dictum that Saddam Hussein had “weapons of mass destruction.” The eight year, three trillion dollar war was pointless, just as is the de-industrialization of the United States by free trade.

  I am not the only economist who takes issue with the free-trade dogma. A number of competent economists have criticized free-trade theory. For example, professors Herman E. Daly and John B. Cobb show the inadequacies of the theory in For the Common Good (1989). Professor James K. Galbraith puts the theory to rest in The Predator State (2008). Professor Robert E. Prasch, in a 1996 article in the Review of Political Economy, demonstrates fundamental problems with the theory. Professor Ron Baiman at DePaul University argues that Ricardo’s theory is “mathematically overdetermined and therefore generally unsolvable.” Professor Michael Hudson deconstructs free trade doctrine in Trade, Development and Foreign Debt (2009) and in America’s Protectionist Takeoff 1815-1914 (2010). In 2004, America’s most famous economist, Paul Samuelson, wrote that an improvement in the productivity of one country can decrease the living standard of another. Thus, when U.S. corporations take their technology abroad and integrate it into the productive capability of a foreign country, they reduce the living standards in their home country.

  This brings us to Gomory and Baumol. Samuelson’s 2004 article is a defense of the powerful new work in trade theory by these two authors. Gomory, one of America’s most distinguished mathematicians, and Baumol, a past president of the American Economics Association, show that free-trade theory has many problems because “the modern free-trade world is so different from the original historical setting of the free-trade models.”

  Gomory and Baumol dismiss the alleged gains from offshoring production for home markets: “in almost all cases, most of the economic benefit stays where the value is added. Profits are usually only a small portion of the value added through economic activity, and most of the value added, such as wages, remains local. It matters to a country to be the site of an economic activity, whoever may own the company.”

  Gomory and Baumol show that unlike Ricardo’s win-win outcome based on a simple arithmetical example, sophisticated mathematics proves that in most cases “the outcome [from trade] that is best for one country tends not to be good for another.” Gomory and Baumol re-establish the gains from trade (win-win situation) as a special case of limited applicability. They conclude that “free trade between nations is not always and automatically beneficial. It can yield many stable equilibria in which a country is worse off than it would be if it isolated itself from trade altogether.”

  It will take the economics profession many years to come to terms with this new work. The myth that America’s economic success is based on free trade will be hard to dislodge.

  R.W. Thompson, in his History of Protective Tariff Laws (1888), shows that protectionism is the father of economic development. Free trade has become an ideology. It once had a Ricardian basis, a basis no longer present in the real world. In the United States today, “free trade” is a shield for greed. Short-term gains for management and shareholders are maximized at the expense of the labor force and the economic welfare of the country. Jobs offshoring is dismantling the ladders of upward mobility that made America an opportunity society.

  Offshoring Exports Jobs Instead Of Products

  Offshoring’s proponents defend the practice on the grounds that it is free trade and thereby beneficial.

  We saw in the previous section that free trade is not necessarily beneficial. Let’s now examine whether offshoring is trade.

  In the traditional Ricardian free trade model, trade results from countries specializing in activities where they have comparative advantage and trading these products for the products of other countries doing likewise. In Ricardo’s example, England specializes in woolen cloth and Portugal specializes in wine.

  In the Ricardian model, trade is not competitive. English wool is not competing against Portuguese wool, and Portuguese wine is not competing against English wine.

  Somewhere along the historical way, free trade became identified with competition between countries producing the same products. American TV sets vs. Japanese TV sets. American cars vs. Japanese cars. This meaning of free trade diverged from the Ricardian meaning based on comparative advantage and came to mean innovation and improvements in design and performance driven by fore
ign competition. Free trade became divorced from comparative advantage without the creation of a new theoretical basis upon which to base the free trade doctrine.

  Countries competing against one another in the same array of products and services is not covered by Ricardian trade theory.

  Offshoring doesn’t fit the Ricardian or the competitive idea of free trade. In fact, offshoring is not trade.

  Offshoring is the practice of a firm relocating its production of goods or services for its home market to a foreign country. When an American firm moves production offshore, US GDP declines by the amount of the offshored production, and foreign GDP increases by that amount. Employment and consumer income decline in the US and rise abroad. The US tax base shrinks, resulting in reductions in public services or in higher taxes or a switch from tax finance to bond finance and higher debt service cost.

  When the offshored production comes back to the US to be marketed, the US trade deficit increases dollar for dollar. The trade deficit is financed by turning over to foreigners US assets and their future income streams. Profits, dividends, interest, capital gains, rents, and tolls from leased toll roads now flow from American pockets to foreign pockets, thus worsening the current account deficit as well.

  Who benefits from these income losses suffered by Americans? Clearly, the beneficiary is the foreign country to which the production is moved. The other prominent beneficiaries are the shareholders and the executives of the companies that offshore production. The lower labor costs raise profits, the share price, and the “performance bonuses” of corporate management.

  Offshoring’s proponents claim that the lost incomes from job losses are offset by benefits to consumers from lower prices. Allegedly, the harm done to those who lose their jobs is more than offset by the benefit consumers in general get from the alleged lower prices. Yet, proponents are unable to cite studies that support this claim. The claim is based on the unexamined assumption that offshoring is free trade and, thereby, mutually beneficial.

  Proponents of jobs offshoring also claim that the Americans who are left unemployed soon find equal or better jobs. This claim is based on the assumption that the demand for labor ensures full employment, and that people whose jobs have been moved abroad can be retrained for new jobs that are equal to or better than the jobs that were lost.

  This claim is false. Offshoring affects all tradable goods and services. The nonfarm payroll data collected by the US Bureau of Labor Statistics makes clear that in the 21st century the US economy has been able to create net new jobs only in nontradable domestic services. Such employment is lowly paid compared to high value-added manufacturing jobs and professional services such as engineering. (Tradable goods and services are those that can be exported or that are substitutes for imports. Nontradable goods and services are those that only have domestic markets and no import competition. For example, barbers and dentists offer nontradable services.)

  Moreover, even domestic services, such as school teachers and nurses, which cannot be offshored, can, and are, being performed by foreigners brought in on work visas.

  The growing number of displaced and discouraged unemployed Americans is an external cost inflicted by offshoring firms on the displaced workers themselves, on taxpayers who provide unemployment and welfare benefits, and on the viability of the American political and economic system. The costs inflicted on the economy, taxpayers, and the displaced workers far exceeds the benefits to a few corporate executives and shareholders. The imposition of external costs on society in order to reward a very few is a powerful indication of the failure of laissez faire capitalism.

  Some offshoring apologists go so far as to imply, and others even to claim, that offshore outsourcing is offset by “insourcing.” For example, they point out that the Japanese have built car plants in the US. This is a false analogy. The Japanese car plants in the US are an example of direct foreign investment. The Japanese produce in the US in order to sell in the US. The plants are a response to Reagan era import quotas on Japanese cars and to high transport costs. The Japanese are not producing cars in the US for the purpose of sending them back to Japan to be marketed. They are not using cheaper American labor to produce for the Japanese home market. At least not yet.

  However, as US wages are driven down by offshoring and work visas for foreigners, the US will find itself with an excess supply of labor that can, therefore, be employed at a wage less than labor’s contribution to output. When this occurs, more prosperous countries, such as Japan, possibly could begin ruining their own economy by exporting jobs to Third World America.

  Other apologists imply that H-1B and other work visas are a form of “insourcing.” They argue that the ability of US firms to bring in foreigners to compensate for alleged shortages of US workers allows the corporations to keep their operations in America and not have to move them abroad. This false claim, which a Washington Post editorial (March 2, 2009) endorsed, was rebutted by Senators Charles Grassley and Bernie Sanders, who observed that “with many thousands of financial services workers unemployed, it’s absurd to claim that banks can’t find top-notch American workers to perform these jobs” (Washington Post, March 5, 2009).

  Senators Grassley and Sanders could have made a stronger point. The work visa program is supposed to be for specialized, high-tech skills that are allegedly in short-supply in the US. In fact, the vast majority of those brought in on work visas are brought in as lower-paid replacements for American workers, who are dismissed after being forced to train their foreign replacements.

  The practice of replacing American employees with foreigners brought in on work visas is reported more at the state and local level than nationally. For example, on March 30, 2009, a Charlotte, North Carolina, TV station, WSOC, reported that Wachovia Bank (now Wells Fargo) was cutting labor costs by bringing in foreign replacements for American employees.

  Congress forbade banks that receive bailout money from hiring foreigners to replace American employees. But the H-1B visa lobby got its hands on the legislation and inserted a loophole. The banks cannot directly hire foreigners as replacements for US employees, but they can hire contractors to supply “contract labor.” The bank pays the contractor, and the contractor pays the workers.

  Computerworld (February 24, 2009) reports that the H-1B visas are becoming the property of Indian contract labor firms, such as Tata, Infosys, Wipro, and Satyam.

  These firms contract with American employers to supply reduced-cost labor from abroad with which to replace American employees.

  The combination of offshoring and work visas is creating a new kind of American unemployment that cannot be cured by boosting consumer demand. Business Week (March 9, 2009) reports that JPMorgan Chase is increasing its outsourcing to India by 25 percent. Computerworld (February 24, 2009) reports that Nielsen Company, which measures TV audiences and consumer trends for clients, is laying off American employees at a Florida facility after announcing a 10-year global outsourcing agreement valued at $1.2 billion with Tata. Computerworld quotes Janice Miller, a city councilwoman: “they are still bringing in Indians, and there are a lot of local people out of work.”

  The New York Times (March 6, 2009) reports that IBM is laying off US employees piecemeal in order to avoid compliance with layoff notice laws. According to the New York Times, “ IBM’s American employment has declined steadily, down to 29 percent of its worldwide payroll.”

  The American population is being divorced from the production of the goods and services that they consume. It is the plight of a third world country to be dependent on goods and services that are not produced by its work force. The unaddressed question is how can Americans who are either unemployed or employed in low wage domestic services purchase the foreign made goods and services that are marketed to them?

  If news reports are correct, even the lowest level American jobs are subject to outsourcing. The fast food chain, McDonald’s, is experimenting with having drive-up window orders routed to India via a VoIP inte
rnet connection. The person in India then posts the order to the kitchen and sends the billing to the cashier. If this works for McDonald’s, the laid off software engineers, IT workers, and former bank employees will not even be able to get a job at a fast food restaurant.

  Indeed, Americans already experience difficulty in finding restaurant jobs because of “insourcing.” Young people from abroad are brought in on temporary visas and supplied by contractors to restaurants where they wait tables and do food prep work. In pharmacies, they serve as assistants. In grocery stores they are employed as checkout clerks. Mexicans have a large share of construction and agricultural jobs. Americans are finding occupation after occupation closed to them.

  The United States is unable to deal with its serious economic problems, because powerful interest groups benefit from the continuation of the problems. As long as narrow private interests can cloak themselves in free trade’s claim of increased general welfare, the American economy will continue its relative and absolute decline, and American taxpayers will continue to bear the cost of workers displaced by offshoring and work visas.